Commentary: Public companies don’t always do better when private

Of course, Michael Dell himself, along with Silver Lake, a private equity firm, would like the company’s shareholders to believe the contrary. They’re offering to take the company private through a leveraged buyout worth $24 billion, reasoning that the computer manufacturer
US:DELL
has greater odds of long-term success once it is freed from the necessities of meeting Wall Street’s short-term earnings expectations — and therefore can truly invest in ways that promote long-term success. Read “Dell faces mutiny, stigma of management buyouts.”

But a fascinating recent study found no evidence that public companies undergoing LBOs do any better, on average, after going private.

The study was conducted by three researchers at the University of Texas at Austin which, ironically, is just down the road from Dell’s headquarters. Because the study was completed last November, it does not focus on Dell’s proposed LBO. Its authors are Jonathan Cohn, a finance professor at that university, Lillian Mills, chairwoman of its accounting department, and Erin Towery, a PhD candidate there. Read the study about the financial benefits of going private.

Prior to this study, researchers had been unable to study the performance of companies undergoing LBOs because, by definition, they’re private — and the necessary data were unavailable. But the authors of this new study overcame that difficulty by obtaining confidential corporate tax return information from the IRS for companies going private. Armed with this data, they were able to examine the operating performance of 317 LBOs between 1995 and 2007.

Their found “little evidence of operating improvements subsequent to an LBO.”

Of course, these LBOs on average didn’t suffer a significant diminution in operating performance either. Might that be seen as something of a victory, since companies undergoing an LBO might be suffering at the time they go private — as indeed some consider Dell to be right now?

Cohn, in an interview, discounted this possibility. He and his co-authors studied LBO performance in a number of different ways — including comparing each of the LBOs they studied to a control group of companies that did not go private. They found no significant difference in the operating performance of comparable companies that stayed public and companies that underwent LBOs.

To be sure, the researchers’ result is based on an average of the 317 companies they studied — and some did better than that. So there’s no guarantee that Dell won’t be able to beat these odds.

But if it does, it’s doubtful that its success would be caused by its being private rather than public. That’s because, as Cohn stressed, there’s no evidence that not being public, in and of itself, is the benefit that private equity firms would like us to believe.

Given what this study has found, you might be wondering why private equity firms are so eager to help companies go private through LBOs. One answer might be a finding of a number of other research studies: Private equity firms funding LBOs do earn excess market returns. These other studies’ findings, in conjunction with those of this recent study, suggest that private equity firms might be extracting exorbitant payments at the expense of the LBO companies themselves.

If so, this might help to explain why Silver Lake, along with Michael Dell himself, are so willing to put up such large sums of money to purchase Dell — and why some other large shareholders, such as Southeastern Asset Management and T. Rowe Price, are so opposed to the proposed LBO.

In any case, this new study suggests that investors should stop assuming that it’s automatically a Bad Thing for companies to suffer under the spotlight provided by Wall Street’s scrutiny of quarterly earnings reports.

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